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What is the Home Market Effect?

The Home Market Effect is a term used in macroeconomic theory describing a concentration of an industry’s production facilities being concentrated in the larger national economies where its primary consumers exist.

The home market effect (HME) is a theoretical term used in trade theory economics. The domestic economy in this case has an effect on the international prices and economy related to these goods.

If several large companies drill oil in a country with a low cost to drill and transport the oil to refineries, the cost to the international market will depend on the domestic economy of that country to an extent, from the per capita income to the infrastructure.

The firms that operate in this theatre, experience increasing returns of scale to an extent that they effectively monopolize the industry from the one or two countries in which they operate.

Keywords: macroeconomics, trade balance, monopolies, trade imbalance, comparative advantage, infrastructure, trade theory,